Why Vanguard’s High-Yield Dividend ETF (VYM) Is the Safest Way to Stay Invested Today

Are you looking for value, yield, safety, or diversification in your portfolio? What if I told you that you could get all of the above, all conveniently packaged in a single exchange traded fund (ETF)?

Vanguard is known for its broad array of low-cost funds, and as the name implies, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) rewards its long-term holders with consistent passive income through dividend distributions.

At the same time, VYM offers a sense of stability during these turbulent times, not only through dividend payments but also by diversifying across well-known large-cap businesses in multiple market sectors. In more ways than one, the Vanguard High Dividend Yield ETF lives up to its name while also providing a safe-haven alternative for defensive-minded investors.

Low Cost, High Yield

When you’re shopping for funds to put in your portfolio, always remember to check the expense ratio. This is the annual fee paid to the fund managers (in this case, the fund managers at Vanguard), typically expressed as a percentage, that will be automatically deducted from your returns on your investment in the fund.

As a rule of thumb, if an ETF’s annual expense ratio is below 0.25%, that’s pretty good. The Vanguard High Dividend Yield ETF’s expense ratio is just 0.06%, so this is about as cost-efficient as it gets.

You’ll get that 0.06% annual fee back and much more, as this fund pays a juicy forward annual dividend yield of 2.53%. The dividend payments and percentages vary over time, but Vanguard has reliably distributed cash payments to VYM’s owners every three months.

Of course, you don’t want to just assume Vanguard’s High Dividend Yield ETF will pay for itself. After all, dividend payments aren’t much of a consolation prize of an ETF’s price sinks. So, let’s take a closer look at VYM’s composition with an eye toward quality and value.

Just the Right Mix

Achieving safety means diversifying across a wide variety of market segments without over-allocating into one particular sector. It also means leaning toward good values, which can be measured through price-to-earnings (P/E) ratios (not the be-all and end-all, by any means, but still a useful metric for this discussion).

For these purposes, the Vanguard High Dividend Yield ETF fits the bill perfectly. The fund’s composition indicates a balanced mix of stocks from many market sectors: 10.2% technology, 11.9% industrials, 10.7% consumer staples, 9.3% energy, and so on. The only unusually heavy weighting is the fund’s 22.9% allocation toward the financials sector, so you’ll want to be generally bullish on banking stocks if you’re invested in the VYM ETF.

The fund tracks the FTSE High Dividend Yield Index, and it has performed well over the past few years:

In fact, the Vanguard High Dividend Yield ETF has gained more than 85% during the past five years — and that doesn’t include the delightful dividends.

This just goes to show that when you invest in high-quality names, you’ll likely fare well over the long term. As for the VYM ETF, its component stocks include famous firms like JPMorgan Chase (NYSE:JPM), Broadcom (NASDAQ:AVGO), Exxon Mobil (NYSE:XOM), Home Depot (NYSE:HD), and Walmart (NYSE:WMT) — all world-class mega-caps that pay decent quarterly dividends.

There’s no need to discuss the valuation of every component in VYM, but just to provide a few examples of the companies’ trailing P/E ratios (as of March 19):

• JPMorgan Chase: 12x
• Exxon Mobil: 14.63x
• Walmart: 35.66x
• Broadcom: 88.26x

I’ll admit, Broadcom stock isn’t a great example of rock-bottom value right now. Still, the Vanguard High Dividend Yield ETF’s overall trailing P/E ratio is 19.8x, so evidently the handful of high flyers are balanced out by the lower-multiple components in the fund.

Who Should Buy the VYM ETF?

As we’ve discovered, it’s entirely possible to achieve long-term growth without sacrificing value. Not only that, but investors can diversify across multiple market segments, get portfolio exposure to famous names, and look forward to sizable dividend distributions each and every quarter.

In other words, with the Vanguard High Dividend Yield ETF, you can have it all in one convenient, managed fund. Why do all of the legwork of stock picking when VYM’s expense ratio is a measly 0.06%?

Thus, if safety and passive income are among your top priorities, the VYM ETF is right up your alley. With that in mind, feel free to grab a handful of VYM shares so you can start collecting those delicious dividends.

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